Can China Buy Its Way Into Global IC Industry?

TAIPEI — Just before the Labor Day weekend, the investment community and Chinese media were abuzz with two hot news items: Intel, in hopes of bolstering its mobile business, is pursuing China’s Spreadtrum as an investment (according to a Chinese news site); and Intel should consider buying Taiwan’s MediaTek (urged by RBC Capital Markets analyst Doug Freedman).

Reached by EE Times on Tuesday, Sept. 2, Intel spokesman Chuck Mulloy was, of course, mum, other than noting: “We don’t comment on speculation nor do we speculate on what might have caused the speculation.”

This is a predictable no-comment. Both items might indeed be pure “speculation” worthy of no further interest.

However, it was only a few weeks ago when a group of Chinese investors -- including a state-owned firm -- offered a buyout proposal to US digital imaging chipmaker OmniVision. Putting together a string of recent events, we couldn’t help but wonder:

Does selling Spreadtrum to Intel, or allowing the foreign chip giant to invest in the now state-owned company, make sense for China?

Do any of these moves have anything to do with China’s recently unveiled “National Framework for Development of the Integrated Circuit Industry”? (After all, the Chinese government is setting up a huge annual investment fund to support the nation's semiconductor industry.)

Some US-based electronics industry executives told us that a Spreadtrum sale and an Omnivision purchase are both among the potential financial plays contemplated by China’s investment community. Others, however, are skeptical of the whole scenario.

EE Times has been scrambling to connect the dots of China’s seemingly unrelated investment moves in recent months.

Nicky Lu, WSC Chair

Nicky Lu, chairman of Etron Technology Inc. in Hsinchu, Taiwan, is one of those industry executives convinced that these maneuvers are closely tied to China’s national IC industry framework. He says they make perfect sense.

Just to be clear, we regard Lu as “the man in the know.”

While serving as chair of the Taiwan Semiconductor Industry Association (its politically correct name is “Semiconductor Industry Association in Chinese Taipei”), Lu earlier this year became the chair of the World Semiconductor Council (WSC).

Lu explains that China’s new policy, different from those in the past, is the infusion of private investment funds. It allows professional financial investors to bet on which entities -- fabless, foundries, and/or research institutes -- deserve the funding.

In Lu’s view, if the Chinese funds actually succeed in improving the value of Spreadtrum and manage to sell it off (to Intel or not), China wins.

China’s proposal to buy OmniVision, on the other hand, will have further impact.

By taking over the world’s leading CMOS image sensor vendor, China will gain instant access to the global market and the company’s formidable market share. More importantly, such a deal generates demand for volume production of CMOS image sensors in China (not in Taiwan) -- enough to fill the capacity of home-grown Chinese fabs like Semiconductor Manufacturing International Corp. (SMIC) based in Shanghai.

In short, China’s investment funds are on the lookout for acquiring successful companies in the global market.

How China funds are allocated.Click here for larger image.(Source: Data compiled by EE Times based on media reports in China and Taiwan, and interviews with industry sources)

As illustrated in the table above, as much as 600 billion RMB (nearly US$98 billion), to promote M&A activity, will flow to local governments and their regional private equity investments in China. This is in addition to government funds for national IC industry support.

Modeled after the Beijing IC Industry Equity Investment Fund, Chinese provinces including Wuhan, Shanghai, and Shenzhen are racing to build “regional” private equity funds. Rivalries between different regional private equity funds were already evident when the Beijing-based Tsinghua Unigroup outmaneuvered the Shanghai Pudong Science and Technology Investment Co. (PDSTI) to buy Shanghai-based Spreadtrum. Meanwhile PDSTI, not to be outdone by Beijing, unveiled a plan to acquire Montage Technology of Shanghai. PDSTI is also a part of the investment group that has offered to buy OmniVision.

China’s national blueprint for semiconductor industry development is far from the stodgy, top-down model of the planned economy era, according to China hands familiar with the industry. Today, it’s much more “market-driven.”

A case in point is that the money made available by the government and China’s private investment funds isn’t just for investing in Chinese companies. The funds can go global to acquire technologies and companies with the best potential to expand China’s semiconductor industry. The OmniVision deal would fit that bill, according to Lu.

"The Business Week article (27Aug2014) says that China regards Semiconductors as a strategic industry needed for economic development and national security. China will increase financial support for the industry and plans to set up a national investment fund."

Of course it does. Much of China's money comes from exporting electronic goods and therefore Chinese companies are aquiring as much as possible to make a breakthrough entry into the world IC race, especially when the IOT sector is about to boom and China won't be lagging behind.

@Junko: you may have already seen this news, Chinese chip-testing companies Jiangsu Changjiang Electronics Technology Co. and Tianshui Huatian Technology Co. are eyeing StatsChipPAC buyout, close to $1.0B.

The Business Week article (27Aug2014) says that China regards Semiconductors as a strategic industry needed for economic development and national security. China will increase financial support for the industry and plans to set up a national investment fund.

It seems to me that the strategic plan is well beyond orchestration into an implementation phase. The deficit of China is much less than those of western economies including US, it can afford to issue bonds to backup these overseas acquisitions.

Just in time for integration to get more difficult. The ic industry offers no free ride from here on. Maybe this makes it more attractive as a cash cow if you can grab a large enough chunk of it. Hard to tell....

If current policies of China are any indication, opportunities will only be accessible to locals. I don't think it is healthy for the industry!

True. Definitely, these opportunities are for locals and not for foreigners....although we might be working for Chinese-owned companies at one point. And that's precisely why each nation, wihtout necessarily subsribing to protectionism, needs to develop its own industrial policy.

@Junko: Regarding your comment: China has the power to generate the new world order as far as the semiconductor industry is concerned...

I agree that it is only China as of now that can disrupt the existing hegemony of high tech industry of which semiconductor is a prominent one. I do recognize another comment below that says don't make opinions on this topic based on what is China today, a fair one. Unless there are major economic policy shifts toward protectionism in Western economies, it will be most likely China that will own the end-to-end semiconductor industry.

How ever, what discomforts me the most is the lack of opportunities for foreigners to work in China-owned industries in China, in stark contrast to western economies which are more open and welcome talent from any where. If current policies of China are any indication, opportunities will only be accessible to locals. I don't think it is healthy for the industry!

@collion0, I am neither overhyping the story nor underplaying it. I would not go so far as China is "buying the world." That said, if China's investment community can value semiconductor companies more favorably than its US counterpart, yes, China has the power to generate the new world order as far as the semiconductor industry is concerned.

Now, China acquire not only Semidconductor companies in the world, mainly on American and European, but also purchase in other field.

Many Chinese people with much cash travel around world. They purchase nearly all the things without asking price on the way they visit. Many foreingers wonder how the Chinese could have such amazing purchasing ability.

Because the China 's printing cash machines are working all year, even one second stop.

You wrote: I wonder if all of the 200,000 graduates in integrated circuits are working in jobs that matches their technical skills. What I have heard is that a good majority are not.

I tend to agree with you assessment. However, the point here is the very fact that the semiconductor industry is pitched to sutdents in China as a promising industry (as more and more money flowing into the very industry.)

Now, that will make a huge difference, if not now, but in the next 10 years time.

As Nicky Lu told me, Don't judge China by looking at the country today. China seems to have all the elements getting ready now...